NTU Student Research

This report is published for educational purposes only by students competing in the CFA Institute Research Challenge.

Technology, Hardware

Asustek Computer
Recommendation: Buy Price Target: NT$315.0

Date: 2012/1/18
Market Profile 52-wk High 52-wk Low Avg. Daily Vol. Beta 2010 Dividend Yield Shares Outstanding Market Cap FINI Holdings Insider Holdings NT$265 NT$178 4.66 mn shares 0.91 5.1% 752.76 mn NT$168.62 bn 49.7% 3.8%

Ticker: Price:

2357 TT(2357.TW) NT$ 224.0

Asustek Rides on the Tide of Ultrabook and Tablet Growth

Earnings Overview Net Profit (NT$ mn) 2009A 2010A 2011E 2012E 2013E 12,479 16,489 16,068 19,764 23,479 EPS (NT$) 16.06 21.55 21.35 26.26 31.19 EPS YoY (%) (25.6%) 34.2% (1.0%) 23.0% 18.8% P/E (x) 14.7x 10.5x 10.1x 8.7x 7.4x P/B (x) 0.8x 1.6x 1.5x 1.5x 1.3x Div. Yield (%) 4.9% 5.1% 5.3% 5.6% 7.0%

BV per share NT$138.6 Debt/ Total 0% Capital* ROE 12% *Debt/Total Capital = (LT & ST Debt)/ (SH Equity + LT & ST Debt)

Highlights
We initiate coverage of Taiwanese notebook vendor Asustek Computer (2357 TT/2357.TW) with a target price of NT$315 (41% upside). We are bullish on industry trends such as the introduction of Ultrabook and Windows 8, which we believe will especially benefit Asustek due to its early entry on Ultrabook and the above-industry-average R&D capability. Asustek will also release new low-end tablets, thus boosting tablet shipments by 69%, and should further expand its position in the emerging markets. High Exposure to Emerging Markets Beats the Industry Slowdown: We believe Chinese notebook market will continue to grow at 18% YoY due to the low PC penetration rate, even in the case of economic slowdown, still contributing 28% of total sales in 2012. Furthermore, since HP and Acer are still relatively weak due to internal restructuring, we foresee that they will continue to concede market share. Accordingly, the estimated sales contribution from emerging markets will increase to 65% in 2012 from 62% in 2011. Ultrabook Boosts Replacement Demand (413% Shipment 2010-13 CAGR): The Ultrabook is a slim-type notebook, with higher ASP and margin compared with regular notebooks. It is thin and fast with long battery life, and thus should induce users to replace their old notebooks. As one of the four first-tier Ultrabook makers, Asustek is believed to become the No. 1 Ultrabook vendor in 2012 with 15.7% global Ultrabook market share. Benefitting from its first mover advantage, Asusteks Ultrabook penetration rate will reach 16%, higher than the 10% industry average. We expect Ultrabook shipments to increase sharply after ASP drops to attractive levels in 3Q12, as component costs can be reduced by 29%, resulting in 13% YoY notebook shipment growth in 2012. Low-end Models & Windows 8 to Boost Tablet Shipments by 69%: Asusteks low-end model, the Eee Pad Memo while at US$249 only priced insignificantly higher than competitors, offers significantly superior specs. We believe this high capability/price product caters to the general publics needs in emerging markets. Moreover, the differentiating market segmentation protects Asustek from fierce price competition with e-readers, such as Kindle Fire and Barnes & Noble Nook. Furthermore, Windows 8s dual-interface will induce more users to purchase devices capable of fully utilizing all of its functions. We recognize that several of Asusteks products especially emphasize this dual functionality, rendering Asustek to be the main beneficiary in the upcoming wave of devices combining the benefits of touch and keyboard input. Valuation Great Potential for Capital Gains (up to 61%): Our 12-month target price of NT$315 (41% upside) is based on applying a P/E multiple of 12.0x to our 2012 EPS NT$26.3, and even in our worst-case scenario, Asustek only has a potential downside of 11% from its current price level. Our target price implies a cash adjusted P/E of 9.7x and EV/EBITDA of 8.1x while the company is currently only trading at 6.7x and 5.6x respectively, thus providing an excellent investment opportunity.

Asustek - LTM Daily Price/Volume

NT$ mn shares

Source: Bloomberg

Important disclosures appear at the back of this report

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Date: 2011/01/18

Top Consumer Notebook Brand Enjoying Multi-Growth Catalysts

Figure 1: Asustek Gained 2% Worldwide Market Share in 4Q093Q11
4Q09 3Q11 WW* 8% #7 10% #5 WE** 11% #3 15% #3 EE** 20% #1 20% #1 China 11% #3 15% #2 Asia*** 7% #7 11% #4 JP 2% #10 3% #8 USA 6% #6 4% #7 *Worldwide **West Europe (WE); East Europe (EE) ***Asia excludes JP and China
Source: IDC

Asustek Computer (Asus) was founded as a motherboard manufacturer in 1990, and has turned itself into one of the biggest PC vendors in Taiwan emphasizing on consumer notebook. The company surpassed Toshiba and became the 5th largest notebooks (NB) vendor in the world with 9.7% market share in 3Q11, improving from 8.2% in 4Q09. Within consumer NB, Asustek is the 3rd largest globally with 12.3% market share after HP (16.8%) and Acer (15.6%). This position is supported by its strong industrial design capability for consumer electronics. Asustek continues to maintain its leading position as the largest motherboard maker with 40%-45% global market share in 2011. The companys products include notebooks (57% of 9M11 revenue), netbooks (10%), tablets (10%) and motherboards (18%). Asustek widely covers all markets, including Asia Pacific (47% of 9M11 revenue), West Europe (24%), East Europe (14%), North America (10%), and others. As the No. 1 motherboard brand worldwide, Asustek would make the best use of its motherboard channel relationship to better promote its notebook in emerging markets. Asustek 9M11 Revenue: NB contributes 58% of revenue; APAC and Europe dominate 85%
Figure 2: 9M11 Sales by Product Figure 3: 9M11 Sales by Region

Source: Asustek Company data

We are positive on Asusteks 2011-13 revenue growth because it should be one of the biggest beneficiaries from 1) the newly launched Ultrabook and 2) introduction of Windows 8 in 2H12 while 3) its aggressive penetration plan for emerging markets should continue to boost its market share in consumer NB. First to launch Ultrabook: Asustek was the first PC manufacturer to introduce Ultrabook, the Zenbook, complying with Intels Ultrabook specifications to the market in 4Q11. This lightweight NB features enhanced boot-up speed as well as battery efficiency, and we expect Ultrabook to occupy 10% of world NB shipment this year from only 0.5% in 2011. Asustek should be one of the major beneficiaries of this industry trend. Fast progress in tablet sales: Asustek first entered the tablet market in 2Q11 and soon became the No. 2 vendor of Android-based tablets worldwide by 3Q11 by selling 1.2 mn units (4%) within six months. Growing NB in emerging markets - No. 1 in Russia, No. 2 in China and more to achieve: During 2011, Asustek expanded its market share in Asia (excluding Japan) by 4.2% (Figure 3). In Russia, the Company has surpassed Acer and became No. 1 notebook vendor in 3Q11. In China, Asustek gained 2.3% additional market share in 2011, reaching 14.6% and became the second largest vendor behind Lenovo. Figure 5: Asustek LTM stock performance vs. TWSE and TWSECPE
Source: IDC

Figure 4: Asustek Market Share in Asia Pacific Excludes Japan

-4% -23% -23%

Source: Bloomberg, NTU Team Note: TWSECPE (Taiwan Taiex Computer and Peripheral Equipment Industry Index)

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Favorable PC & Tablet Industry Trends Benefit Asustek

We foresee accelerating world PC shipment growth in 2012-13 of 7% and 11% YoY, respectively, after the flat 1% YoY growth in 2011(Figure 6). Ultrabook is likely to stimulate replacement NB demand while continuous NB penetration improvement in emerging markets should provide further support to PC shipment growth. The new OS Windows 8 enhances critical functions for Windows-based tablets, and we are positive on its potential to carve out more market share. Asustek is likely to be the major beneficiary given its early readiness in Ultrabook while its successful detachable tablet design (detachable keyboard dock) can further leverage Windows 8 dual user-interface (UI) to attract users hoping to utilize both entertainment and professional functions. We are also positive on the firms plans to expand its market share in Brazil and India (currently < 2% market share), after it has already successfully achieved top two positions in China and Russia. Ultrabook NB replacement cycle around the corner; expecting 9% YoY in 2012 industry NB shipment We are positive that the attractive Ultrabook design will stimulate NB replacement. Since most consumers purchased their latest notebook in 2008 or earlier (Figure 6), many of them may consider upgrading to a newer and faster model. We believe that they will be particularly attracted by the sleek design and speed of Ultrabook, thus boosting demand and industry penetration rate for these specific models. Unique features: The critical design requirements make Ultrabook 1) more attractive than regular notebooks: < 0.8 inches thick; < 1.5 kg; 2) longer battery life : >7 hours; 3) rapid start, fast response: 2second instant-on with SSD (versus 10-sec on HDD); 4) price: < US$999 (versus regular notebook 2011 ASP: US$764). Widely anticipated by the corporates: According to a survey by Techaisle, nearly 50% of small and medium businesses expressed their interests in Ultrabooks over regular notebooks. Since Windows remains the preferred OS when it comes to running business applications and certain specialized software, we believe that Ultrabooks will become the prevailing commercial notebooks after the retail price reaches a level near US$750 in 4Q12. A competitive-priced and OS-friendly choice: Based on our channel check, many MacBook Air users also install Windows on their devices in order to run native Windows applications, but the dual OS runs more slowly and consumes 50% more power, making Windows-based Ultrabook a better choice for the majority of Windows users.
Source: NTU Estimates

Figure 6: Global Ultrabook Penetration and Shipments (est.)

mn units

Figure 7: Desktop and notebook shipment previously highly correlated with GDP growth
GDP effect faded since 2011, indicating the saturation of global PC demand

Source: IDC, IMF, NTU Estimates

Asustek: One of the leaders on Ultrabook Our initial analysis suggests that Acer, Asustek, Lenovo, HP and Samsung may lead in Ultrabook shipments in 2012. However, Samsung and Lenovo still need time to strengthen their distribution channels in US and Europe while Lenovo is already well recognized in China. Asustek should enjoy a period of exponential growth of Ultrabook in 2012 while it will benefit from declining component costs and is able to enhance its profit margins due to stronger R&D capability. It could leverage its early market entry along with excellent R&D capability to differentiate its Ultrabook models from competitors.

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The introduction of new Ivy-bridge models will enhance battery efficiency and boost Ultrabook shipments in 3Q12 while the launch of Windows 8 and ASP (factory price) decline to US$595 will further amplify shipments in 4Q12.
Figure 8: R&D Expense as % of OPEX

Pioneering R&D know-how: Asustek is well recognized for its consistently high product quality and pioneering designs such as netbooks and the detachable tablet (tablet with keyboard dock). Over 21% of the firms operating expenditure is dedicated to R&D, which helps to shorten the product development cycle and support early preparation for future products. Component cost reduction: We expect Intel to reduce its CPU price by at least US$30 in 2012, considering the threat from ARM offering competitive ASP and battery savings. We forecast further US$65 cost reduction in SSD and another US$5 saving in casing. We also expect Asustek to release low-end Ultrabook models, which can reduce cost of storage and casing to US$35 and US$15, respectively, by applying HDD and plastic casing. After considering the sales mix of standard (32%) and low-end Ultrabooks (68%), we therefore estimated combined cost savings of 28% in 2012, allowing manufacturers to offer lower ASP without hurting overall gross margin around 16% levels (vs. 12.8% on regular NB).

Source: Bloomberg

Figure 9: Ultrabook Bill of Material

Cost down of SSD, casing, and CPU facilitates Ultrabook ASP drop

Source: NTU Estimates

Windows 8: Revolutionary OS facilitates demand for tablets and notebooks Microsoft has introduced its new OS, Windows 8, which will be adopted by future PC and tablets. We applause its special Dual UI function, which allows tablet users to switch between entertainment mode (Metro UI) and traditional windows working environment (Traditional UI). We believe that the launch of Windows 8 in 4Q12 will benefit the PC industry, especially non-Apple tablets and Ultrabooks. In the initial stage, we expect more significant impact on tablet demand as Windows 8 attracts new tablet buyers, but it may take a while to boost PC replacement demand given limited hardware upgrade requirements. We forecast the world market share for non-Apple tablets will grow by 5%, thus reaching 32% in 2012. In the long run, we are positive on potential backloaded PC replacement growth as soon as the market has accumulated sufficient positive user experience on the new dual UI. We expect Windows 8, combined with the Ultrabooks hardware and design advancements, to boost the industry Ultrabook penetration rate from 0.5% in 2011 to 10% in 2012. Dual User-Interface offers extended functionality: Windows 8 provides two user-interfaces (UI): Traditional UI and Metro UI. The Traditional UI provides a working environment similar to current Windows 7 while Metro UI offers a touch interface. Users can switch between the two UIs as needed, allowing users to explore a new touch screen experience while retaining their familiar Windows working environment. Several market surveys, including one conducted by BCG, have already suggested that Windows 8 is highly anticipated by existing Windows users. Majority of users are waiting for compatible tablets on Windows: More than 78% of PC users are currently using Windows as their main operating system, according to Chitika, a research firm. The familiarity with the Windows environment and cross-platform integration increase the incentive to use a Windows-based OS on other devices, and we thus believe that the majority of Windows users will be inclined to purchase Windows tablets. Windows 8 significantly improves user experience, which should help to boost its market share. Improved system performance: The functional breakthroughs of Windows 8 are 1) faster boot-up time, reduced by 30-70% compared with Windows 7, and 2) lower power consumption. The new OS improves the

Figure 10: Metro UI of Windows 8

Source: Microsoft

Figure 11: Traditional UI of Windows 8

Source: Microsoft

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computing power management and allows programs to run more smoothly, thus addressing the main issues of Windows 7. Windows on ARM (WoA): A cost-efficient combination WoA vs. Windows on Intel
Figure 12: Preference of Tablet OS

WoA vs. Android on ARM Reliable OS: Higher security protection on Windows Approved Apps: Quality control Software compatibility: Convenience of Microsoft Office

Cost reduction: Lower price of ARM compared with Intel CPU (US$30 vs. US$120) Longer battery hours: Low power consumption Open platform: Rapid hardware improvements

Asustek should benefit from growing tablet market and broadened customer base
Source: BCG (Jun 2011)

Figure 13: Eee Pad Transformer and Slider

Windows 8 highlights the core design of Asustek: We estimate Asustek tablet shipments to grow by 83% YoY in 4Q12 and 43% YoY in 1Q13 after the release of Windows 8. We believe Windows 8 on touch screens will trigger more demand for tablets for two reasons. First, Asusteks tablet design takes full advantage of the dual interface of Windows 8. For example, the current two tablet models (Eee Pad Slider and Eee Pad Transformer See Figure 13) both feature touch screens as well as a slide-out or keyboard dock. Furthermore, Asusteks status as one of the selected first-tier Windows on ARM (WoA) tablet makers allows it to benefit from first-mover advantage and become one of the leaders of WoA tablets. Aggressive move to low-end tablets: We expect Asusteks tablet shipments to increase by 78% in 2012. Asusteks Eee Pad Memo offers superior specs at $249, a very competitive price compared with its peers (Product Comparison See Appendix 36). Judging from Kindle Fires dramatic success in 4Q11, we believe the general public yearns for good bargains in low-end models. Asusteks low-end tablet is priced only US$50 higher than the Kindle Fire, but is equipped with more advanced hardware components, hence providing a more attractive capability/price results. Besides launching its low-end model in the US, Asustek is expected to also target emerging markets, thus avoiding direct competition with Amazons Kindle Fire.
Figure 14: Asustek - Tablet Shipment & ASP
mn units US$

Source: Company data

Figure 15: Asustek - Annual Shipment & Global Market Share

mn units

Source: NTU Estimates

Source: NTU Estimates

High Exposure to Emerging Markets Beats the Industry Slowdown Demand of PC upgrades from desktops to notebooks, low PC penetration rate (below 30%), and high population growth in emerging markets stimulate the notebook shipments. The emerging markets should be the key growth driver for notebooks with 20% CAGR in shipments from 2010 to 2017 while developed markets grow slowly at 8% 2010-2017 CAGR. As emerging markets account for over 60% of total revenue to Asustek, we believe Asustek will be the biggest beneficiary from emerging market growth and we foresee a further market expansion in Brazil and India for Asustek. Fast-growing China market with 18% YoY sales growth, contributing 28% sales in 2012: Low PC penetration rate and high population growth support strong notebook demand in China. Total sales from China will contribute to 28% of Asusteks revenue in 2012 because more third-tier cities will expand and bring in new demand. We believe the strong demand of first-time PC buyers from third-tier cities will support the market growth of 18% YoY, even in the case of a slowdown of Chinas economy.

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Figure16: Global Notebook Shipment Forecast, 2010-2017E

2012/01/18

Weak major competitors concede market share in China, Brazil, and India: HP and Acer, both among the top four players in emerging markets, are relatively weak in defending their market share since organizational restructuring is still underway. HPs deteriorated financial position, downgraded to BBB+ after the acquisition of British search engine company Autonomy, limits HPs financing capability for market expansion. As for Acer, its hectic management in China and Europe and lack of concrete strategy put itself at a disadvantage. We believe this provides an opportunity for Asustek to gain 2% additional market share in both Brazil and India. Strong motherboard brand image and wide-spread channels accelerate market share gains: As Asustek enters Brazil and India market, we believe Asustek can leverage its well-known motherboard brand image to promote its notebooks in new markets. As 3C malls remain the dominant notebook channel in emerging markets, we believe that Asusteks motherboard channel relationships will benefit its shelf presence for notebooks, accelerating market penetration in Brazil and India.

Source: MIC

Figure 17: Rapid growth in notebook shipments in China, Brazil, and India (All vendors)
Low penetration rate and high population growth support high notebook demand. Notebook Shipment Growth (YoY %) 2010 China Brazil India
Source: MIC, NTU Estimates

2011E 28% 40% 43%

2012E 22% 37% 35%

2013E 17% 30% 30%

2014E 17% 25% 27%

35% 100% 52%

Figure 18: Emerging China and India grow faster than the developed countries
Asustek targets in China, Brazil, and India in 2012-2014

Penetration Rate 2009 2015E

20% 34%

4% 17%

32% 58%

32% 63%

89% 97%

98% 129%

Source: MIC, NTU Estimates Note: Penetration = PC ownership/Population

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Buy Asustek: Expanding Product Lines & Growing Markets

We recommend investors to buy Asustek for its strong growth potential in Ultrabook and tablets, which, combined with the continuous expansion in emerging markets, should boost 2012-13 EPS by 23% and 19% to NT$26.3 and NT$31.2, respectively. The stock is traded at 8.7x 2012E PER, which we consider an attractive price to buy if compared with its EPS growth in the next two years. Asustek is also cash rich its net cash of NT$45 bn implies 2012E cash-adjusted PER of only 9.7 times, if we deduct the surplus cash from market capitalization. We view short-term market concerns regarding the world macro outlook and 4Q11 results uncertainties as good opportunity for investors to accumulate the stock. Our price target of NT$315 is based on 12 times 2012E PER, implying 41% upside potential from the current level. Improved profitability along with surging Ultrabook shipments: Aforementioned strong Ultrabook industry growth and Asusteks leading position should support its 2012-13 revenue and profit growth. The ASP decline in Ultrabook to US$690 by 3Q12 should boost Ultrabook demand. We expect Ultrabook to contribute to 16% of Asusteks 2012 NB shipment (versus 10% of industry), the percentage which could further grow to 31% in 2013 (versus 22% of industry). We forecast Asusteks 2012 NB shipment to grow 13% YoY to 21.9 mn units, compared with 9% industry shipment growth. Our analysis suggests that Ultrabooks will contribute NT$4.96, or 19%, to Asusteks EPS in 2012. Figure19: Ultrabook vs. regular notebook shipment and ASP

Source: Company data, NTU Estimates

Best prepared for Windows 8 platform: Asustek has already established a strong track record in the tablet market, being the 2nd biggest Android tablet vendor in the world. We feel that the dual UI offered by Windows 8 should make Microsoft-based tablets more attractive, and Asustek could ride on the growing trend in 2012 as Windows-based tablets could finally grab a more significant market share. Asustek, with its strong R&D capability, has also been selected as one of the four initial manufacturers of WoA tablets, the only Taiwanese company nominated. This allows Asustek to benefit from first-mover advantage in developing ARM-based tablets. Extending its success in emerging markets: Asustek has already achieved leading positions in China (No. 2) and Russia (No. 1) with 14.6% and 19.7% market shares in 3Q11, respectively. We remain positive on its revenue growth in these two countries as well as its plan to expand markets into Brazil and India. Asustek could leverage its existing motherboard distribution channels to expedite market share gains in emerging markets as it has built strong relationships with local 3C malls. Increased penetration to US retail market: Asustek recently expanded its retail channel with US retail giant, Wal-Mart, aiming to gain a stronger foothold in the worlds biggest PC market (20% of the global PC shipments). Initially, we forecast 30% YoY growth from a low base to 2.3mn units, which would boost Asusteks 2012 total NB shipment by 2%.

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Value through Growth 10.4% 2010-2012E EPS CAGR

Strong EPS growth of 23% in 2012 with low downside potential (11% downside in bear scenario versus 41% upside in base case) supports buy rating. P/E Attractive current valuation, 41% upside Our P/E based 12-month target price of NT$315 (41% upside) for Asustek is based on implying a P/E multiple of 12.0x to our 2012 brand EPS forecast of NT$26.3 (17% higher than consensus). Asusteks historical forward P/E range for 200810 was 6.9x14.7x, with an average of 11.0x. Currently the stock is trading at 8.7 times its 2012 P/E, at the lower end of its historic PE band, and with its increasing ROE and EPS growth we believe Asustek deserves a multiple slightly above its historical mean, especially considering depressed valuation in the historic period due to the 2008 financial crisis, European debt crisis as well as Thai flood. Cash-Adjusted P/E Asustek is cash rich and holds zero debt. An alternative valuation measure is to calculate cash-adjusted P/E by deducting net cash from market capitalization. Our target price implies a 2012 cash-adjusted P/E of 9.7x while the company is currently only trading at 6.7x its 2012 cash-adjusted P/E, one of the lowest among its peers. EV/EBITDA Using EV/EBITDA, our target price implies a multiple of 8.1x, but the company is currently only traded at 5.6x 2012E EV/EBITDA. Asusteks historical forward EV/EBITDA range for 2008-10 was 15.5x35.4x, with a mean of 25.2x. We recognize the sharp downward trend in recent years and thus believe that in the future Asusteks EV/EBITDA multiple will be closer to that of its industry peers while Asustek most likely continues to trade at a premium considering historical trading ranges and strong future EBITDA growth. Scenario Analysis Limited downside (-11%) in worst-case scenario In order to ensure the accuracy of our target price and further support our buy rating, we developed two scenarios (See Appendix 4) to evaluate Asusteks stock price performance under different market conditions. Bear Scenario: Slower adoption of Ultrabook, ASP decreasing faster than cost, lower OPM Bull Scenario: Faster adoption of Ultrabook, cost decreasing faster than ASP, higher OPM In our worst-case scenario net profit is 16% lower than in our base case, and the bull case is 16% higher than our base case. We furthermore sensitized the EPS with different P/E multiples, ranging from 9.0x to 15.0x. Figure 20: Asustek - EPS & P/E Sensitivity Analysis

Target Price Sensitivity Analysis NT$ 9.0x 10.0x 11.0x 12.0x 13.0x 14.0x 15.0x P/E Multiple 22.1 199 221 243 265 287 310 332 24.2 218 242 266 290 314 339 363 EPS 26.3 236 263 289 315 341 368 394 28.3 255 283 311 340 368 396 425 30.4 273 304 334 364 395 425 455

Source: NTU Estimates

Applying a P/E multiple of 9.0x to our bear scenario our TP would shrink to NT$199, thus representing a potential downside of 11% from the current share price. Conversely, in our best-case scenario, implying a multiple of 12.0x to our bull EPS of NT$30.4, Asusteks share price would reach NT$364 (63% upside).

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2012 Net Profit Growth 23% YoY boosting EPS to NT$26.3

Earnings Ultrabook expected to push up sales (2011-13E shipment CAGR: 413%) & improve margins 13% EPS CAGR from 2010-13E: According to our forecasts, total notebook shipments CAGR for 2010 to 2013E will be 15% while revenue and gross profit CAGR for the same period both are expected to reach 15% each. EBIT and net profit respectively are expected to grow by 24% and 13% on average per year. In comparison, for the past 3 years Asustek realized 9.7% revenue CAGR, 8.7% gross profit CAGR, 9.4% operating profit CAGR and 0.1% net profit CAGR. Figure 21: Asustek - Sales & EPS Growth
YoY YoY

Figure 22: Asustek - Gross & Net Profit Margin

NT$ bn

Source: Company data, NTU Estimates

Operating margin rising to more than 5%: In the past 3 years gross margins ranged from 11.6% to 13.8%. We expect gross margin to further improve due to a change in the product mix (Appendix 9). Higher margin products, such as the Ultrabook and tablets, should make up a higher share of revenue, which will also translate into a higher operating margin. While pretax and net profit margins are expected to initially decline due to lower non-operating income in 2011, this trend is likely to reverse in 2012. Further EM Expansion (> 70%): According to our estimates, Asustek will further expand its position in the emerging markets. We expect that 29% of revenue in 2012 will come from China and 17% from Eastern Europe. West Europe will decrease to 17% and Asia ex. China & Japan will make up 24%. The remaining 13% of revenue will come from the USA, Japan, and rest of the word (Appendix 10). Ultrabook Major Revenue Contributor: With the launch of the Ultrabook, we expect regular notebooks shipment will gradually decrease. The tablets should cannibalize shipments from netbooks. Since motherboard is expected to remain flattish, their overall share of shipments will decrease as well. According to our forecast, 2012 revenue contribution by product should be as follows: NB: 45% Ultrabook: 18% Netbook: 6% Motherboard: 14% Tablet: 8% and Others: 9%. Cash Flow Stable Operating Cash Flow & Dividend Yield of at Least 7% in 2013 According to our forecast, operating cash flow (OCF) will slightly decrease in 2012 due to increasing net working capital requirements as the companys sales grow. However, by 2013, OCF should exceed previous levels. We do not expect any major acquisitions of PP&E or LT investments, only maintenance CAPEX, and also assume that financing cash flows will remain at roughly its previous level, as it is unlikely that Asustek will change its dividend policy or require any further external funding. At a payout ratio of 55% Asusteks dividend yield in 2013 would be 7% while historical payout ratios have occasionally been even higher, supporting a dividend yield of 10% at a 75% payout ratio. Balance Sheet & Financing Zero Debt & ROE Increasing to 19% Following 2009, Asusteks debt ratio increased by about 15% and its debt-to-equity ratio by roughly 38%, reaching 44% and 80% respectively.1 We forecast that both ratios will keep rising, reaching 50% and 101% in

NT$ bn

Source: Company data, NTU Estimates

Debt ratio: Total Liabilities/Total Assets Debt-to-equity ratio: Total Liabilities/Total Stockholders Equity

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2013. However, the majority of Asusteks liabilities are short-term (A/P, Other ST Liabilities) and since the company does not have any interest-bearing debt, its debt-to-capital ratio remains at 0%.2 In terms of operating performance, we see that Asusteks cash conversion cycle (CCC) decreased from 70 days in 2009 to 41 days in 2010, but due to rising sales and thus increasing net working capital requirements, the companys CCC should rise to 45 days in 2013. Nevertheless, we still see slightly higher Inventory, A/P, and A/R turnover (Appendix 14). Furthermore, while current and quick ratios have both been on the decline for the past 3 years, our forecast concludes that this trend will continue until 2012, before reversing in 2013. Asusteks current ratio is still on par with the industry average of 1.65 while its quick ratio is slightly below the peer average of 1.07. Finally, ROE and ROA both are expected to increase over the coming years, in 2013 reaching 19% and 9% respectively while industry averages as of the last reporting date are 19% ROE and 8% ROA (Appendix 15). Using DuPont analysis, we can see that Asusteks ROE is increasing due to a higher operating margin as well as rising asset turnover.

Investment Risks
Investment risks to our target price include: 1) Severe economy slowdown in Europe; 2) Slow market share gain; 3) Increased peer competition in Ultrabook; and 4) HDD shortage impact Severe economy slowdown in Europe We forecast West Europe should drop by 5% while East Europe grows at 10%. As West Europe and East Europe respectively contribute 25% and 15% of the total revenue, we expect the combined impact from Europe, 1% YoY decline in revenue, should have limited impact. As for Euro depreciation, Asustek is fully hedged on Euro and 30% foreign exchange hedged on total revenue, according to the company. We believe that Euro depreciation should have limited impact on Asustek in 1H12, but a continuous depreciation may cause exchange losses in the long run. Slow market share gain in emerging markets In our base case, we expect the following market share gains: China (+1.5%), Brazil (+2~3%), and India (+2~3%) in 2012. Asustek currently has little presence in Brazil and India with less than 2% market share in 2011. Nevertheless, the markets in China, Brazil, and India will continue to grow at 18% YoY, 37% YoY, and 35% YoY, respectively, due to low NB penetration rate and high population growth. Even in the bear case with no market share gain, the notebook shipments for Asustek in 2012 should remain as high as 19% YoY from these countries. (The base case contributes 27% YoY) Increased peer competition in Ultrabook Asustek did not unveil new Ultrabook model in CES 2012 while most PC vendors showed several new Ultrabooks and many scheduled to launch new models in 2Q12. Nevertheless, we believe that most consumers will delay the purchase until Windows 8 is launched, and Asustek is likely to release the new models by then. HDD shortage impact Uncertainty is eliminated; supply back to normal by mid-2012 Most PC makers will suffer from the HDD shortage until mid-2012, but key component manufacturers have already resumed production before December 2011. As the required recovery time is 6-8 months, we believe that 1) strongest impact on PC makers in 1Q12 (24% production shortfall to demand); 2) by 2Q12 production will be back to normal; 3) cumulated production shortfall will be fully digested by 3Q13.

Debt-to-capital ratio: (Short-term Debt + Long-term Debt)/(Total Debt + Total Equity)

10

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Appendix
Financials
Exhibit 1: Asustek- Financial Summary
Income Statement (NT$mn) Revenue by Product Notebook Ultrabook Motherboard Netbook Tablet Others by Region West Europe East Europe China Asia (ex.Japan & China) Others COGS Gross Profit OPEX Operating Profit Nonoperating Profit (net) Pretax Profit Net Profit EPS (NTS) Dividend per share (NT$) Balance Sheet (NT$mn) Cash & Cash Equivalents Accounts Receivable Inventories Other Current Assets Current Assets LT Investments Fixed Assets (net) Other Assets Total Assets Accounts Payable ST Debt Other Current Liabilities Current Liabilities LT Debt Other LT Liabilities Long-term Liabilities Total Liabilities Shareholders' Equity Total Liab. & SH Equity 2010A 321,300 179,246 52,279 50,478 39,294 80,324 48,195 80,324 64,259 48,195 (277,548) 43,752 (30,111) 13,641 5,105 18,746 16,489 21.55 11.66 2010A 41,395 39,861 41,847 17,308 140,411 44,426 4,499 1,445 190,781 44,572 37,434 82,006 2,732 2,732 84,738 106,044 190,781 2011E 349,780 198,836 8,865 56,948 18,800 31,661 34,706 76,960 55,971 94,450 76,960 48,974 (302,084) 47,695 (29,738) 17,957 1,600 19,557 16,068 21.35 11.48 2011E 41,485 43,787 52,805 20,434 158,510 49,752 3,812 2,043 214,118 48,893 47,815 96,708 6,999 6,999 103,707 110,411 214,118 2012E 425,174 193,360 74,915 58,850 35,755 23,910 38,384 73,000 71,000 124,403 100,790 55,981 (366,173) 59,001 (37,278) 21,722 2,090 23,812 19,764 26.26 12.95 2012E 45,351 52,927 63,159 24,699 186,136 49,752 3,302 2,470 241,660 58,480 57,796 116,277 6,999 6,999 123,276 118,385 241,660 2013E 492,308 182,770 135,450 59,475 51,930 20,790 41,893 80,000 82,000 150,308 115,000 65,000 (425,112) 67,196 (41,581) 25,614 2,674 28,288 23,479 31.19 16.05 2013E 54,231 56,038 67,046 26,151 203,466 49,752 2,711 2,615 258,545 62,080 61,193 123,273 6,999 6,999 130,272 128,272 258,545 Cash Flow Statement (NT$mn) Net Profit Depreciation & Amortization Change in Working Capital Others Operating Cash Flow Acquisition of PP&E Acquisition of Investments Proceeds-Disposal of Investments Others Investing Cash Flow Treasury Stock Cash Dividends Others Financing Cash Flow Net Change in Cash Financial Ratios Margins (%) Gross margin EBIT margin Pre-tax margin Net margin YoY growth (%) Revenue Gross Profit Operating Profit Pretax Profit Net Profit Liquidity Current Ratio Quick Ratio DIO DSO DPO CCC Profitability ROA ROE Investment Valuation P/E (x) P/B (x) EV/EBITDA (x) Div. Yield (%) Leverage Debt Ratio* Debt-to-Equity* Capitalization Ratio 2010A 16,488 1,315 (2,143) (3,343) 16,335 (1,414) (485) 2,373 (70) (2,121) (2,321) (8,918) (20) (12,577) 1,637 2010A 13.6% 4.2% 5.8% 5.1% 2011E 16,068 1,363 (560) (1,654) 15,216 (1,069) (2,868) 44 16 (3,877) (2,609) (8,638) 0 (11,247) 91 2011E 13.6% 5.1% 5.6% 4.6% 2012E 19,764 1,828 74 (5,632) 14,929 (1,318) (1,318) (9,745) (9,745) 3,866 2012E 13.9% 5.1% 5.6% 4.6% 2013E 23,479 2,117 (2) (5,632) 22,491 (1,526) (1,526) (12,085) (12,085) 8,880 2013E 13.6% 5.2% 5.7% 4.8%

29.5% 51.7% 202.8% 45.9% 32.1%

8.9% 9.0% 31.6% 4.3% (2.5%)

21.6% 23.7% 21.0% 21.8% 23.0%

15.8% 13.9% 17.9% 18.8% 18.8%

1.7 1.0 53 41 53 41

1.6 0.9 57 44 56 44

1.6 0.8 58 42 54 46

1.7 0.9 56 40 52 45

7.6% 11.8%

7.9% 14.8%

8.7% 17.3%

9.4% 19.0%

10.5 1.6 8.7 5.1%

10.1 1.5 6.2 5.3%

8.7 1.5 5.4 5.6%

7.4 1.3 4.3 7.0%

* Debt Ratio=Total Liabilities/Total Assets Debt-to-Equity=Total Liabilities/SH Equity

44.4% 79.9% 0.0%

48.4% 93.9% 0.0%

51.0% 104.1% 0.0%

50.4% 101.6% 0.0%

Source: Company data, NTU Estimates

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CFA Institute Research Challenge Exhibit 2: PC Industry Comparables

Price Company Market cap P/E(x)* 2012E 8.5x 19.9x 14.6x 8.9x 7.7x 6.4x 8.9x 11.5x Cash-adj. P/E* 2011E 7.8x N/A 6.8x 18.6x 5.4x 11.2x 9.0x 10.5x EV/EBITDA(x) ROE(%)

2012/01/18

EPS Growth*

Ticker local US$ mn 2011E 224 5,718 10.1x Asustek 2357.TW 38 3,511 N/A Acer Inc. 2353.TW 6 7,909 16.4x Lenovo Group Ltd. 0992.HK 313 17,316 10.3x Toshiba 6502 16 28,529 7.1x Dell Inc. DELL 26 52,557 5.5x HP HPQ Median 8.7x Average 9.8x Source: Bloomberg, NTU Estimates Cash Adjusted P/E=(Market Capitalization + Net Debt)/Net Income

2012E 2011E 2012E 2011E 2012E 2010 2011E 2012E 6.7x 6.5x 5.6x 15% 17% 27% 5% 23% 21.5x N/A 13.6x -8% 7% 20% -148% NMF 7.1x 4.2x 4.7x 21% 23% -215% 70% 29% 16.1x 5.1x 4.6x 12% 15% -118% 157% 15% 6.1x 3.4x 4.0x 45% 36% 41% 49% 0% 13.0x 5.7x 6.4x 25% 19% 5% 16% -13% 13.0x 4.7x 4.7x 12.7x 4.6x 6.7x 19% 20% -54% 29% 8% *EPS Adjusted

Exhibit 3: Asustek- Model Assumptions

Income Statement Revenue Gross Margin Operating Margin Reasoning & Calculation See detailed revenue forecast See detailed revenue forecast See detailed revenue forecast NONOP Interest Income (net) Investment Income Pegatron Askey Others Exchange Gain/(Loss) Other Income (net) Dividend Income

0.04% (See Pegatron Consensus NI) 0.1% 0.3% Pegatron Consensus NI NT$ mn Q1 Q2 2011 (559) (672) 2012 1,350 1,350 2013 1,815 1,815 24.5% of Pegatron NI Assumed to be zero; No forecast basis Assumed to be zero; No forecast basis Assumed to be zero; No forecast basis

Q3 367 1,350 1,815

Q4 707 1,350 1,815

FYE (157) 5,398 7,260

Median consensus estimates for Pegatron's net income. Annual NI equally split over each quarter, except for 2011 Q4, which is calculated as annual NI less sum of NI of the previous 3 quarters. We apply annual NI instead of quarterly NI as more estimates are provided for annual NI, which we thus believe is more accurate than quarterly data.

Tax Rate Balance Sheet Cash & Cash Equivalents Working Capital

17.0%

Taiwan Corporate Tax Rate Reasoning & Calculation Plug Quarterly DIO, DSO, and DPO to capture effect of seasonality. Calculated as average of the respective quarter's DIO, DSO, and DPO for the past 3 years.

Plug Seasonal DIO, DSO & DPO Days DIO DSO DPO

Q1 56 43 58

Q2 68 43 63

Q3 59 39 49

Q4 54 39 50

Other Currents Assets/Sales LT Investments Fixed Assets Other Assets/Sales Other Current Liabilities/Sales Other LT Liabilities Cash Flow Statement D&A/Sales CAPEX/Sales Dividend Payout Ratio Others (Operating CF)

5.0% fixed Plus CAPEX, less D&A 0.5% 11.7% fixed Reasoning & Calculation 0.4% 0.3% 55.0% Plug

Company guideline is >50% Plug

Source: Company Data, Bloomberg, NTU Estimates

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CFA Institute Research Challenge Exhibit 4: Asustek- Scenario Analysis

Base NB Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Netbook Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Tablet Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Bull NB Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Netbook Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Tablet Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Bear NB Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Netbook Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Tablet Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Source: NTU Estimates 2011E 14.3 32% 462 9.87 52% 2011E 4.80 11% 217 0.35 2% 2011E 1.80 4% 347 0.93 5% 2012E 14.3 29% 446 9.59 40% 2012E 4.00 8% 197 0.26 1% 2012E 3.20 7% 365 1.77 7% 2013E 14.1 26% 428 9.07 32% 2013E 3.60 7% 191 0.23 1% 2013E 4.70 9% 366 2.58 9% Ultrabook Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Motherboard Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Others Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS 2011E 0.3 1% 975 0.59 3% 2011E 23.40 53% 80 7.53 40% 2011E NA NA NA (0.38) (2%) 2012E 3.6 7% 735 4.96 21% 2012E 23.95 49% 81 7.79 33% 2012E NA NA NA (0.42) (2%) 2013E 7.9 14% 569 8.96 32% 2013E 24.40 45% 80 7.87 28% 2013E NA NA NA (0.46) (2%)

2012/01/18

2011E 14.45 32% 462 10.00 52% 2011E 4.80 11% 217 0.35 2% 2011E 1.80 4% 347 0.93 5%

2012E 16.10 30% 449 10.86 39% 2012E 4.00 7% 197 0.26 1% 2012E 4.20 8% 375 2.39 9%

2013E 14.30 25% 428 9.19 28% 2013E 3.70 6% 191 0.24 1% 2013E 5.60 10% 367 3.09 10%

Ultrabook Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Motherboard Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Others Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS

2011E 0.31 1% 975 0.61 3% 2011E 23.60 52% 80 7.60 40% 2011E NA NA NA (0.39) (2%)

2012E 4.10 8% 792 6.60 24% 2012E 25.00 47% 82 8.26 30% 2012E NA NA NA (0.44) (2%)

2013E 9.50 16% 590 12.09 37% 2013E 24.50 43% 83 8.14 25% 2013E NA NA NA (0.41) (1%)

2011E 14.20 32% 462 9.83 58% 2011E 4.80 11% 217 0.35 2% 2011E 1.80 4% 346 0.93 5%

2012E 14.20 32% 441 9.42 47% 2012E 3.95 9% 197 0.26 1% 2012E 2.50 6% 365 1.38 7%

2013E 15.90 32% 415 9.90 45% 2013E 3.35 7% 191 0.21 1% 2013E 3.00 6% 366 1.65 7%

Ultrabook Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Motherboard Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS Others Shipments (mn units) % of Total Shipments ASP (US$) EPS Contribution (NT$) % of Total EPS

2011E 0.30 1% 975 0.59 3% 2011E 23.30 52% 80 5.65 33% 2011E NA NA NA (0.39) (2%)

2012E 1.60 4% 710 2.09 10% 2012E 22.70 51% 79 7.19 36% 2012E NA NA NA (0.40) (2%)

2013E 3.60 7% 526 3.41 15% 2013E 23.10 47% 78 7.26 33% 2013E NA NA NA (0.40) (2%)

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CFA Institute Research Challenge Exhibit 5: Asustek- PE Band and EV/EBITDA Band

2012/01/18

Source: NTU Estimates

Exhibit 6: Asustek- Quarterly P&L

(NT$ mn) Sales Gross profit Operating profit Pre-tax profit Net profit 1Q11 73,905 11,468 3,461 3,678 3,421 2Q11 71,666 10,556 4,245 4,957 3,595 14.7% 5.9% 6.9% 5.0% (3.0%) (4.7%) 3Q11 102,077 12,488 5,260 5,656 4,681 12.2% 5.2% 5.5% 4.6% 42.4% 24.0% 4Q11E 102,169 13,183 4,991 5,266 4,371 12.9% 4.9% 5.2% 4.3% 0.1% 22.1% 1Q12E 96,426 13,591 4,717 5,144 4,270 14.1% 4.9% 5.3% 4.4% (5.6%) 30.5% 2Q12E 94,809 12,985 4,872 5,298 4,397 13.7% 5.1% 5.6% 4.6% (1.7%) 32.3% 3Q12E 110,442 15,363 5,794 6,577 5,459 13.9% 5.2% 6.0% 4.9% 16.5% 8.2% 4Q12E 123,496 17,062 6,339 6,793 5,638 13.8% 5.1% 5.5% 4.6% 11.8% 20.9% 1Q13E 113,762 15,518 5,864 6,422 5,330 13.6% 5.2% 5.6% 4.7% (7.9%) 18.0% 2Q13E 117,891 16,097 6,118 6,681 5,545 13.7% 5.2% 5.7% 4.7% 3.6% 24.3% 3Q13E 129,900 17,811 6,781 7,758 6,439 13.7% 5.2% 6.0% 5.0% 10.2% 17.6% 4Q13E 130,755 17,770 6,852 7,427 6,165 13.6% 5.2% 5.7% 4.7% 0.7% 5.9%

Gross margin 15.5% Operating margin 4.7% Pre-tax margin 5.0% Net margin 4.6% Revenue QoQ (11.7%) Revenue YoY (7.7%) Source: NTU Estimates

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CFA Institute Research Challenge Exhibit 7: Asustek Stock Price vs. Monthly Sales (Consolidated) Stock Price vs. Monthly Sales
NT$ NT$bn

2012/01/18

Stock Price vs. Monthly Sales YoY

NT$ %

Source: Bloomberg, TEJ

Source: Bloomberg, TEJ

Exhibit 8: Asustek Monthly Sales Forecast

Source: NTU Estimates

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CFA Institute Research Challenge Exhibit 9: Asustek - Sales by Product, 2010-2013E

2012/01/18

Source: NTU Estimates

Exhibit 10: Asustek - Sales by Region, 2010-2013E

Source: NTU Estimates

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CFA Institute Research Challenge Exhibit 11: Asustek - Product Shipment/ASP/Gross Margin Forecast
2009 Shipment (mn units) NB+Ul tra book+Netbook NB+Ul tra book Regul a r NB Netbook Ul tra book MB Ta bl et Shipment Growth YoY NB+Ul tra book+Netbook Global NBs+Ultra+Net NB+Ul tra book Regul a r NB Netbook Ul tra book MB Global Desktop Ta bl et ASP(US$) Regul a r NB Netbook Ul tra book MB Ta bl et ASP YoY Change Regul a r NB Netbook Ul tra book MB Ta bl et Gross Margin Rate Regul a r NB Netbook Ul tra book MB Ta bl et
Source: NTU Estimates

2012/01/18

2010 16.9 10.9 10.9 6.0 NA 21.6 NA

2011E 19.4 14.6 14.3 4.8 0.3 23.4 1.8

2012E 21.9 17.9 14.3 4.0 3.6 24.0 3.2

2013E 25.6 22.0 14.1 3.6 7.9 24.4 4.7

12.2 6.8 6.8 5.4 NA 21.0 NA

14% 24% 17% 17% 10% NA (5%) (11%) NA

39% 5% 60% 60% 11% NA 3% 13% NA

14% 4% 33% 31% (20%) NA 8% (3%) NA

13% 9% 23% 0% (17%) 1087% 2% 4% 78%

17% 16% 23% (1%) (10%) 122% 2% 4% 47%

571 310 78 NA

543 278 80 NA

456 218 975 80 349

443 197 695 81 345

428 191 566 80 371

(20%) (7%) NA (9%) NA

(5%) (10%) NA 3% NA

(16%) (22%) NA 1% NA

(3%) (9%) (29%) 1% (1%)

(3%) (3%) (19%) (1%) 7%

13.6% 9.0% 20.0%

13.4% 8.5% 20.0%

13.2% 8.2% 17.0% 20.3% 14.3%

12.8% 8.0% 16.2% 20.6% 13.9%

13.0% 8.0% 14.9% 21.0% 13.6%

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CFA Institute Research Challenge Exhibit 12: Asustek Revenue Breakdown by Product/ Product Mix Forecast
2009 Revenue (NT$mn) NB+Ul tra book+Netbook NB+Ul tra book Regul a r NB Netbook Ul tra book MB Ta bl et Others Total Revenue Revenue Growth NB+Ul tra book+Netbook NB+Ul tra book Regul a r NB Netbook Ul tra book MB Ta bl et Total Product Mix (Sales) NB+Ul tra book+Netbook NB+Ul tra book Regul a r NB Netbook Ul tra book MB Ta bl et Others 168,388 117,746 117,746 50,643 NA 49,497 NA 30,293 248,178 2010 229,724 179,246 179,246 50,478 NA 52,279 NA 39,294 321,297 2011E 237,337 205,676 196,811 31,661 8,865 56,948 19,050 35,727 349,062 2012E 290,855 266,945 192,030 23,910 74,915 58,850 33,460 40,816 423,981 2013E 339,010 318,220 182,770 20,790 135,450 59,475 52,770 40,816 492,071

2012/01/18

(4%) (6%) (6%) 2% NA (13%) NA (7%)

36% 52% 52% (0%) NA 6% NA 29%

3% 15% 10% (37%) NA 9% NA 9%

23% 30% (2%) (24%) 745% 3% 76% 21%

17% 19% (5%) (13%) 81% 1% 58% 16%

68% 47% 47% 20% NA 20% NA 12%

71% 56% 56% 16% NA 16% NA 12%

68% 59% 56% 9% 3% 16% 5% 10%

69% 63% 45% 6% 18% 14% 8% 10%

69% 65% 37% 4% 28% 12% 11% 8%

Source: NTU Estimates Note: Others include desktop, monitor and smartphone.

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CFA Institute Research Challenge Exhibit 13: Asustek EBIT/EBIT Margin Forecast

2012/01/18

Source: NTU Estimates

Exhibit 14: Asustek Turnover Ratios Forecast

Source: NTU Estimates

Exhibit 15: Asustek ROA/ROE Forecast

Source: NTU Estimates

19

CFA Institute Research Challenge Exhibit 16: Asustek Current Ratio/ Quick Ratio Forecast

2012/01/18

Source: NTU Estimates

Exhibit 17: Asustek DIO/DSO/DPO/CCC Forecast

Source: NTU Estimates

20

CFA Institute Research Challenge

2012/01/18

Ultrabooks
We believe Ultrabook will overpass MacBook Air in the following quarters for these reasons:

1. High OS familiarity
Windows has the highest market share among all operating systems. In the past, users buy MacBook Air and installed Windows on it. This is because there was no slim type notebook for them to purchase. Besides, Windows has better software compatibility than Ultrabook, especially for business users.

Source: hitslink

2. Longer battery life

Ultrabooks 7 hour battery life is longer than MacBook Airs 4 hour under Windows 7. Most users will choose Ultrabook if they want to work under Windows.

3. Same hardware strength

SSD was not common. However, when SSD is equipped in Ultrabook, Windows users can also enjoy fast boot-up. Ultrabook now has the slim and fast feature as well.

4. Cheaper than MBA

Price is the top factor (55%) that influences the consumer purchase decision, according to insightxplorer. Ultrabook can offer a more competitive price since there are more notebook vendors in the market. Also, Ultrabook is now having around 20% discount to MacBook Air, being a more favorable choice to customers.

Exhibit 18: CES Takeaways ASP Erosion Starts, Low-end Models Emerge in the Market
Source: BestBuy 2012/01/10, NTU Acer Aspire S5 Asus Zenbook Lenovo U310 Samsung Series 5

Size/Weight CPU

13.3/1.35kg, 1.5cm thick Intel Core Series

Storage Price Other

SSD(TBD) TBD(2Q12) HDMI,USB 3.0, Thunderbolt, Magic Flip, Acer Always Connect

11.6/1.2kg, 13.3/1.4kg 0.9cm thick i5-2467M(1.6GHz) i5-2557M(1.7GHz) i7-2677M(1.8GHz) 128GB SSD 256GB SSD US$999~1399 Micro HDMI, USB 3.0, mini VGA

13.3/1.7kg, 1.8cm thick Ivy Bridge platform Core i3/i5 options 500GB HDD 64GB SSD US$699(2Q12) USB 3.0 port, all-important memory card slot

13.5/1.38kg 1.4~1.76cm thick Intel Core i5

500GB HDD 128GB SSD/256GB SSD US$900 8G Memory, HDMI,USB 3.0, Card reader, HD LED SuperBright Display

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CFA Institute Research Challenge Exhibit 19: Ultrabook Bill of Materials

2012/01/18

Source: NTU Estimates

Bill of materials
Component CPU MB Memory SSD Battery Casing OS Panel Others MVA Total Product mix Overall BOM Drop Source: NTU Estimates Note: MVA- Market Value Added 2011 160 70 27 180 30 55 55 70 35 34 716 100% -28% % of Total 22% 10% 4% 25% 4% 8% 8% 10% 5% 5% 100% 2012 130 70 25 115 27 50 55 62 33 28.35 595.35 32% % of Total 19% CPU 12% MB 4% Memory 20% HDD 5% Battery 9% Plastic Casing 10% OS 9% Panel 6% Others 5% MVA 100% Total 2012 HDD+Plastic Casing 130 70 25 35 27 15 55 62 33 28.35 480.35 68% % of Total 19% 12% 4% 20% 5% 9% 10% 9% 6% 5% 100%

22

CFA Institute Research Challenge Exhibit 20: Quarterly Ultrabook Market Share Forecast
4Q11E Acer Asustek Toshiba Lenovo Sony HP Samsung Others Total
Source: NTU Estimates

2012/01/18

1Q12E 19% 20% 12% 20% 0% 16% 12% 0% 100%

2Q12E 14% 13% 10% 17% 5% 14% 13% 15% 100%

3Q12E 13% 15% 7% 14% 4% 11% 14% 20% 100%

4Q12E 13% 16% 8% 15% 6% 13% 14% 15% 100%

27% 29% 15% 29% 0% 0% 0% 0% 100%

Exhibit 21: Quarterly Ultrabook Shipment Forecast by PC vendors, 4Q11E-4Q12E

(000 unit ) Acer Asustek Toshiba Lenovo Sony HP Samsung Others Total Ranking Asustek Mkt Share
Source: NTU Estimates

4Q11E 275 300 150 300 NA NA NA NA 1,025 #1 29%

1Q12E 470 500 300 480 NA 400 300 NA 2,450 #1 20%

2Q12E 650 600 450 800 250 650 600 700 4,700 #4 13%

3Q12E 950 1,100 500 1,000 300 800 1,000 1,450 7,100 #1 15%

4Q12E 1,100 1,360 650 1,300 500 1,100 1,200 1,240 8,450 #1 16%

Exhibit 22: Windows Ultrabook on ARM Provides Better Margin for PC Makers
(US$/unit) Price Retailer Margin Charges Distributer's Margin Charges NB Maker's ASP Related COGS CPU Operating System Others Gross Margin % of Revenue
Source: NTU Estimates

Windows on Intel 1,190 15% 8% 916 716 160 55 501 200 17%

Windows on ARM 1,070 15% 8% 824 586 30 55 501 238 22%

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CFA Institute Research Challenge Exhibit 23: Asustek- Ultrabook Affordability Analysis
Global NB Shipment('000) Asus Ultrabook ASP (US$) Retail Price (US$) Affordable % of People Total Shipments ('000) Apple's Shipment ('000) % of total Non Apple Shipment ('000) Asus in non-apple % Asus's Shipment Forecast ('000) Asus's Ultrabook Shipment('000) 4Q11E 55,353 975 1,229 13% 7,196 1,600 22% 5,596 25% 1,399 300 1Q12E 50,000 891 1,123 13% 6,500 1,365 21% 5,135 25% 1,284 500 2Q12E 53,000 759 956 16% 8,480 1,950 23% 6,530 20% 1,306 600 3Q12E 61,500 693 873 25% 15,375 3,844 25% 11,531 16% 1,845 1,100 4Q12E 62,500 595 750 25% 15,625 4,063 26% 11,563 16% 1,850 1,360 1Q13E 63,000 594 749 25% 15,750 3,938 25% 11,813 16% 1,890 1,500 2Q13E 63,000 578 728 35% 22,050 5,733 26% 16,317 15% 2,448 1,700

2012/01/18

3Q13E 68,000 561 707 40% 27,200 7,072 26% 20,128 14% 2,818 2,300

4Q13E 69,000 545 686 55% 37,950 10,247 27% 27,704 14% 3,878 2,400

Source: NTU Estimates

Exhibit 24: Ultrabook Market Share Forecast

Source: NTU Estimates

24

CFA Institute Research Challenge

2012/01/18

Regular Notebook
Exhibit 25: 2Q11 Market Share of Consumer Notebooks with ASP >US$1000

Source: Gartner

Exhibit 26: HDD Supply Estimation

2011E (mn units) Unconstrained Demand YoY Total HDDs Produced YoY Production Shortfall % of Demand Cumulative Shortfall Inventory Weeks of Inventory
Source: NTU Estimates

2012E 1Q 160 0% 121 (25%) 39 (24%) 87 2Q 166 0% 159 (5%) 8 (5%) 83 3Q 180 3% 185 5% (5) 3% 68 4Q 183 5% 198 65% (15) 8% 44 1Q 166 4% 187 55% (21) 13% 17 2Q 173 4% 187 18% (14) 8% 1 -

2013E 3Q 189 5% 190 3% (1) 1% 0 0.2 0 4Q 193 5% 198 0% (5) 3% (6) 5.5 0.4 1Q 174 5% 189 1% (15) 9% (20) 20.4 1.5 2Q 182 5% 191 2% (9) 5% (30) 29.7 2.1

2014E 3Q 198 5% 190 0% 8 (4%) (21) 21.4 1.4 4Q 202 5% 202 2% 0 0% (21) 21.0 1.4

4Q 175 5% 120 (29%) 55 (31%) 55 -

Exhibit 27: Notebook ASP by PC Vendors (2Q11)

Vendor Acer Asustek Samsung HP Dell Lenovo Toshiba Sony Fujitsu Apple
Source: Bloomberg

ASP(US$) 554 628 652 725 733 752 1,156 1,157 1,280 1,553

PC sales as % of total revenue 81% 73% 1% 30% 67% 94% 14% 10% 20% 34%

25

CFA Institute Research Challenge Exhibit 28: IDC 4Q11 PC Shipment Estimates
Vendor 4Q11 Shipment ('000 units) HP Lenovo Dell Acer Asus Others Total Source: IDC 15,123 13,012 11,970 9,790 6,243 36,564 92,702 (9.1%) 3.7% 8.5% 3.9% 7.9% (3.1%) (0.5%) (15.9%) 36.8% 7.3% (8.0%) 26.3% (5.6%) (0.3%) QoQ YoY 4Q11 Market Share 16.3% 14.0% 12.9% 10.6% 6.7% 39.4% 100%

2012/01/18

3Q11 Market Share 17.9% 13.5% 11.8% 10.1% 6.2% 40.5% 100%

Exhibit 29: PC Vendors Comparison Strengths/Weaknesses

Asustek High R&D capability Good brand Image in Europe Wide MB channel relationship in China High exposure to EMs Cost benefit from MB High exposure to consumer market: correlated to economic change Acer Good brand Image in Europe High brand image from netbook in US. HP Enterprisefocused Global #2 in commercial NB Good marketing and after-service Brand image Dell Enterprisefocused Global #3 in commercial NB Good afterservice Lenovo High exposure to EMs Global #1 in commercial NB Hired Lanci; aggressive expansion plan Samsung Supply chain advantage: low component costs High C/P value Synergy of product integration(ha ndset + NB + TV)

Strengths

Weaknesses

High exposure to consumer market: correlated to economic change Low price strategy: low margins Restructuring

Losing shares in both commercial and consumer notebooks Restructuring

Losing shares in both commercial and consumer notebooks

Suffering operating loss in EMs outside of China

Weak PC channel Weak afterservice

Source: NTU Team

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CFA Institute Research Challenge Exhibit 30: Portable PC Market Share in BRIC by Shipment
Brazil China

2012/01/18

Source: IDC

Source: IDC

India

Russia

Source: IDC

Source: IDC

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CFA Institute Research Challenge Exhibit 31: Regional Portable PC Market Share by Shipment
USA West Europe

2012/01/18

Source: IDC

Source: IDC

Japan

APAC

Source: IDC

Source: IDC

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CFA Institute Research Challenge

2012/01/18

Tablet- Prevailing touch screen applications broadens customer base

Intuitive user interface extends customer base to elderly and children:
We believe the tablet market will continue to grow at 36% CAGR in 2012-2013 as there are still a great amount of consumers contemplating whether or not purchase a tablet. With the release of more attractively priced high-quality low-end tablets, these consumers and those with less disposable income (especially in the emerging markets) are likely to be more inclined to follow the touch trend. Furthermore, due to touch input being more intuitive and easier to learn, consumers that previously had no affinity with complicated electronic devices, e.g. elderly people, will further boost the base of potential customers.

Touch screen trend favors PC vendors with high R&D capability:

As more and more users embrace the benefits of having a touch screen, programmers will keep their focus on supplying programs specifically targeting this touch-screen experience. Furthermore, since extensive R&D resources are required to ensure softwarehardware compatibility and quickly be able to release a full functioning product to the market, vendors with more R&D expertise are at an advantage.

Exhibit 32: 3Q11 Global Tablet Market Share

Source: DigiTimes

Exhibit 33: Total # of Windows Apps on Market Place

Source: wp7appexplorer.com

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CFA Institute Research Challenge Tablets will Keep Growing since Consumer Electronic Market is Well Segmented

2012/01/18

We believe the consumer electronic market is well segmented. PCs, smartphones, E-readers (e.g., Kindles) and regular tablets (tablets excluding e-readers) have a little overlapping on functions and price. Tablet is a product in between of PCs (desktops, notebooks) and smartphone by size and price. Tablet shares some similar features with PC and smartphone, but own its consumer base by providing unique services which can hardly be replaced by either devices.

Exhibit 34: Consumer Electronic Market Is Well Segmented

Source: NTU Team

Regular Tablet vs. Desktop & NB: Serve different needs - Regular tablet: Provide better user experience on entertainment with better portability. - Desktop & NB: Provide better working environment with aid of keyboard and mouse.

Exhibit 35: Percentage of Users Who Use PCs/ Tablets Regularly for Activity
%

Source: Alphawise

Regular Tablets vs. e-readers & Smartphones: Difference in screen size and computing power. - Screen size of e-reader & smartphone is not big enough for users to enjoy movies. - Poor computing power on e-reader & smartphone cannot function complicated tasks well such as running high-end video games (e.g., Warcraft, Battlefield, etc.).

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CFA Institute Research Challenge Core Competence of Eee Pad Unique Detachable/Sliding Keyboard Design

2012/01/18

Asustek is the first tablet maker who applied a detachable (pictures 1 to 3 below) and sliding (picture 4) keyboard design on its tablet models. Besides enjoying first mover advantage, Asustek has set up solid entry barrier by patents relating to several crucial parts of its products. For example, the sliding keyboard design, three-in-one dock, several fixing and circuit modules have been patented by the United States Patent and Trademark Office. To illustrate, we take the Transformer, which can be separated into a panel and a dock. The panel comprises touch screen, CPU, memory, battery, camera and earphone plug. It provides complete tablet function, and can work independently. The dock comprises keyboard, touchpad, power supplier and other expansion such as USB, SD card readers. It provides supportive functions for the panel.

Exhibit 36: CES Takeaways Asustek is Launching Low-end Products to Grab Market Shares
Transformer Prime TF700T Eee Pad Memo 370T Amazon Kindle Fire Nook Color

Launch Time CPU Display OS Memory Camera Weight Thick Connection Price

2Q12 in USA 4 Core Nvidia Tegra 3 CPU 10.1, 1920 X 1080, Super IPS Android 4.0 Ice Cream Sandwich 1GB RAM, 32GB/64GB Storage 8M main autofocus camera. 2M second camera 586g 10.4mm WiFi 802.11 b/g/n, Bluetooth 2.1+ EDR 32GB US$599, 64GB US$699 With Keyboard

2Q12 in USA 4 Core Nvidia Tegra 3 CPU 7.7, 1280x720, IPS Android 4.0 Ice Cream Sandwich 1GB RAM, 16GB Storage 8M Camera 399g TBD HDMI, WiFi, Bluetooth US$249

3Q11 Dual Core TI OMAP4 CPU 7.1,1024 x 600, IPS Android 2.3(Customized) 512MB RAM, 8GB Storage No Camera 413g 11.4mm WiFi 802.11 b/g/n US$199 With Amazon Cloud service

3Q11 800 MHz TI processor 7, 1024 X 600,IPS Android 2.3 512 MB RAM No Camera 448g 12.1mm 802.11 b/g/n US$199

Future Outlook Netbook and Motherboard

Motherboard A saturated market, unlikely to have double digit growth
Desktop penetration already reached a historic high and the market will only have regular replacement demand. In 2011, Asustek owns 40% market share in the motherboard market, and we believe the global desktop market is mature, thus only enjoying single digit growth. We have already seen the penetration rate drop on desktop in US, resulting from a demand shift to notebooks. Asusteks motherboard business is quite mature due to PC market saturation. We estimate Asusteks motherboard shipment will grow 2% YoY and worldwide desktop grows 4% YoY to factor in the notebook substitution effect in developed countries. However, as companies delayed capital expenditure during financial crisis and the average life cycle of desktop replacement is 5 to 7 years, we will see replacement demand from corporates in 2012 and 2013. As for emerging markets,

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CFA Institute Research Challenge

2012/01/18

China motherboard demand grows at 11% YoY in 2010-11 according to MIC, which we estimate with the other emerging markets to be the main source of growth on motherboard.

NetbookShift to low-end tablets

We believe shipments will drop by 17% YoY in 2012 due to cannibalization from tablets. The effect will get more severe as Windows 8 launches in 3Q12, shifting more netbook users to tablets. As tablets enjoy higher margins than netbooks, we believe the shift will enhance the overall operating margin.

Exhibit 37: Asustek Netbook shipment declines, 2009-2013E

Source: NTU Estimates

iYogi Insights- Windows 8

According to a recent survey (Jan. 31, 2013) by iYogi Insights, 57% of existing tablet users would like to upgrade to Windows 8 while 19% of those who do not yet own a tablet declared their intent to upgrade. Consumers seem to endorse Microsofts strategy for a single interface across multiple devices (69%) as 85% of tablet users would like their tablet and PC to have the same feel, with 53% of tablet users desiring to use the Metro interface of Windows 8. Furthermore, Windows 8 will likely benefit from a higher awareness of its release, as 95% of respondents are aware of the soon to be launched new OS as opposed to only 40% for Windows 7.
Source: iYogi Insights

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CFA Institute Research Challenge

2012/01/18

Ownership
Exhibit 38: Asustek- FINI Holdings

Source: TEJ, Bloomberg

Exhibit 39: Asustek Shareholding Structure (Top 10 shareholders)

Rank 1 2 3 4 5 6 7 8 9 10
Source: TEJ, Bloomberg

Top 10 Shareholders Citibank (Taiwan) & Asus ADR Jonney Shih-a ChungHwa Post Standard Chartered Bank & Xie Wei Qi JP Morgan Chase & Saudi Arabia M.A. First Bank & Jonney Shih's Trust AC. Labor Pension Fund Supervisory Committee Standar & Fan Jia De Devel. Fund Account Ted Hsu T'ung Tzu Hsien

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CFA Institute Research Challenge

2012/01/18

Others
Exhibit 40: Stock Price Movement vs. Events

Source: Company data, Bloomberg

Company Governance
Pros Two independent directors High meeting participation rate Engineer-based management team Independent innovation R&D unit Continuous compliance learning among all board of directors Cons Same board of director team and the management team Multi-board of director identities in several companies Board of directors hold significant position in several company subsidiaries

Corporate Social Responsibility - Eco-friendly production, design, and recycling

Asustek puts emphasis on eco-friendly production processes and has acquired IECQ HSPM recognition for its toxin-free production sites worldwide. Its green ideas cover component purchases to back-end recycling, and the complete green plan has won the company the Excellence in Energy Efficient Product Design from 2011 ENERGY STAR Award.

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CFA Institute Research Challenge High R&D capability:

2012/01/18

Asusteks high R&D capability does not only reflect on its fascinating products but also on its malfunction rate. Its laptop malfunction rate is the lowest among the peers, which suggests that warranty costs can be reduced by better R&D capability.

Exhibit 41: 3 Year Laptop Malfunction Rates by Manufacturer

Source: squaretrade

ROE DuPont Analysis

Analyzing Asusteks return on equity in more detail, we can see that its increasing ROE mainly stems from the following factors: 1. Operating margin improvement brought along by the product mix change in which high margin products such as the Ultrabook and tablets contribute a higher share 2. Higher asset turnover as sales grow faster than assets 3. Higher leverage as assets grow faster than stockholders equity due to higher working capital requirements induced by sales growth These combined effects are stronger than the lower interest burden, and together boost Asusteks ROE to 19% in 2013.

Exhibit 42: ROE - DuPont

Source: NTU Estimates

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CFA Institute Research Challenge Exhibit 43: Asustek Group Structure

2012/01/18

Computer Related

AsusTek
(2357)
61% ASMediaTech Askey AXUS EnerTronics

25%

Pegatron (4938)

100%

Unihan Technology
AMA Precision 100% KS-Tech GuanShuo

39%

Kinsus (3189 TT) HuaChi ASRock Advansus

100% 100% Consus Runtop ASAP

100% 85%

100%

100%

59%

100% 100% 100% ChunShuo Kaida

100% 100%

50% AGAit

100%

60%

ASin

100%

100% 100%

AsusTek (ShuZhou) () Huawei 100%

GNDC

100% 100%

KaiShuo AVY precision Ability Enterprise (2374 TT) 100% 100% DonGuan Energy ShuenHai

BaiShuo 13%

57%

IUT Unimax

100%
57%

MinShuo Lumens 51%

100%

Consumer Electronics Related

77% 51% eCareme Shinewave 28% Pegavision 100%

Azurewave (3694 TT)

Source: Company Data

Disclosures:
Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as an officer or director: The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject companys securities. Ratings guide: Banks rate companies as a BUY, HOLD or SELL. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Taiwan, CFA Institute or the CFA Institute Research Challenge with regard to this companys stock.

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